A UK services miss could prompt GDP downgrade

European stocks have continued to remain under pressure this week as further declines yesterday added to the gloomy start to the month.

Mining and energy stocks in particular have come under pressure, as the US dollar, which has been sliding recently, has started to show signs of turning around as metals prices tumbled back, along with oil prices.

While the overall mood this week has been of a rather downbeat nature due to concerns about slowing global growth, some of the economic data on both sides of the Atlantic did show some positive signs in patches. Amongst the more positive performers we saw Spanish and German PMI’s come in at the higher end of expectations, as services PMI’s for April came in broadly as expected, though retail sales numbers for the broader euro area for March were disappointing, declining 0.5%.

Overnight the latest Caixin services PMI for April reinforced concerns about further weakness in Chinese economic activity, slipping back to 51.8 from 52.2 in March, as investors consider the possibility that the better than expected numbers that we saw in Q1 could be as good as it gets for China’s economy this year.

The UK gets its turn today, with the latest services PMI data from the UK economy which despite a fairly decent Q1 appears to have hit a bit of a pothole in April. Both manufacturing and construction PMI’s came in short of expectations with manufacturing slipping into contraction territory for the first time since early 2013.

Given how important the services sector is to the UK economy we really need to see a decent number here or run the risk that we see a growth downgrade next week from the latest Bank of England inflation report. Expectations are for a slight decline to 53.6 from 53.7.

In the US, the data was by and large slightly more positive than negative, though rather worryingly the ADP April jobs report did come in short of expectations of 195k, at 156k, though one should be careful about using it as a forward indicator of tomorrow’s April payrolls report.

On the positive side the ISM non-manufacturing report for April did come in better than expected at 55.7, a four month high, with the employment component also improving, reinforcing an expectation that Q2 is likely to see an improvement for the US economy over Q1.

Whether it is enough to persuade investors that a June rate rise is a realistic possibility is another matter, but look closely enough and there is some evidence that prices could be on the rise, and for some Fed policymakers that could be enough for them to start making louder noises about a move in June.

When looking at yesterday’s ADP numbers the slowdown in jobs was disappointing but in the wider context it’s not where the Fed’s focus is right now. It’s becoming quite apparent that the Fed’s main focus is more on prices and wages than jobs growth at the moment, and there is some evidence that price pressures could be starting to increase, despite falling productivity.

This week’s jump in the prices paid components of the ISM manufacturing and non-manufacturing surveys and the increase in Q1 labour costs could be early indications of this, and as such the focus needs to be more on whether the rise in prices is something the Fed is prepared to ignore at a time when jobs growth and potentially the economy could be starting to slow.

In this context tomorrow’s payrolls report could have added significance especially if jobs growth slows here as well, at the same time as wage growth remains weak. With this in mind today’s comments by St. Louis Fed President James Bullard could shine some light on the Fed’s thinking, given that he is able to flit quite comfortably between being hawkish and dovish in equal measure, and was one of the main protagonists behind the December rate rise.

EURUSD – despite posting a high of 1.1616 this week the recent bullish momentum appears to have subsided. The inability to sustain the move higher could well prompt a pullback towards 1.1420 initially and even potentially towards the 1.1220 area, which if broken could see a move back towards the 1.1140 area, the lows at the end of March.

GBPUSD – the run higher in the pound came to an abrupt halt earlier this week posting a key reversal day in the process, after peaking at 1.4770. Having found support at the 1.4460 level a break could well see a move as low as the 1.4300 level. Only a break below 1.4300 would undermine the bullish scenario.

EURGBP – the euro is currently retesting the 200 week MA at 0.7935. While below the risk remains for a move back down towards the recent lows at 0.7730 and the 0.7690 area. A move and close above 0.7940 retargets the 0.8000 area.

USDJPY – the next support for the US dollar currently sits down at the 200 week MA at 105.20. A weekly close through here has the potential to open up the 100 level, but for now the risk remains for a recovery back through the 107.80 area, which could well see a return to the 109.00 area.

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